CFA Level 1 Portfolio Management Exam ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
with verified answers ||\\//|| ||\\//||
Diversification ratio - correct answer✔✔Std dev. of portfolio returns/average std dev. of ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
returns on portfolio assets ||\\//|| ||\\//|| ||\\//||
Define Contribution (DC) Pension plans - correct answer✔✔• Employer contributes
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
specified sum each period ||\\//|| ||\\//|| ||\\//||
• No guarantee of future benefits
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
• Employee bears investment risk
||\\//|| ||\\//|| ||\\//|| ||\\//||
Defined Benefit (DB) Pension Plan - correct answer✔✔• Employer promises specific
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
payment stream beginning at retirement ||\\//|| ||\\//|| ||\\//|| ||\\//||
• Contributions based on years of service, compensation at/near retirement
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
• Employer bears investment risk
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
• Separate legal entity manages plan assets
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
Endowments - correct answer✔✔• provide ongoing financial support (in the USA, many ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
universities have large endowment funds to support their programs) ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
• investment horizon: LONG
||\\//|| ||\\//|| ||\\//||
• risk tolerance: HIGH
||\\//|| ||\\//|| ||\\//||
• Income needs: LOW
||\\//|| ||\\//|| ||\\//||
• Liquidity needs: LOW
||\\//|| ||\\//|| ||\\//||
Banks - correct answer✔✔Loans are assets, excess reserves invested primarily in fixed-
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
income and money market securities ||\\//|| ||\\//|| ||\\//|| ||\\//||
, • Time horizon: SHORT
||\\//|| ||\\//|| ||\\//||
• Risk tolerance:LOW
||\\//|| ||\\//||
Income Needs: MUST PAY INTEREST ON DEPOSITS ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
• Liquidity Needs: HIGH
||\\//|| ||\\//|| ||\\//||
Insurance Companies (Property Casualty-P&C- and Life) - correct answer✔✔• Time ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
horizon: LONG for Life ||\\//|| ||\\//|| ||\\//||
SHORT for P&C ||\\//|| ||\\//|| ||\\//||
• Risk Tolerance: LOW
||\\//|| ||\\//|| ||\\//||
• Income Needs: LOW
||\\//|| ||\\//|| ||\\//||
• Liquidity Needs: HIGH
||\\//|| ||\\//|| ||\\//||
Portfolio Management Process - correct answer✔✔1) Planning ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
2) Execution||\\//||
3) Feedback ||\\//||
Planning Step - correct answer✔✔• Understand client needs and constraints ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
• Write an Investment Policy Statement (IPS)
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
• Develop an investment strategy consistent with the IPS
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
• Specify performance benchmark
||\\//|| ||\\//|| ||\\//||
Execution Step - correct answer✔✔• Analyze risk and return characteristics of assets ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
classes
• Analyze market conditions to identify attractive asset classes
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
• Identify attractive securities within asset classes
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
• Portfolio construction: Target/strategic asset allocations, individual securities weightings,
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
risk management ||\\//||
with verified answers ||\\//|| ||\\//||
Diversification ratio - correct answer✔✔Std dev. of portfolio returns/average std dev. of ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
returns on portfolio assets ||\\//|| ||\\//|| ||\\//||
Define Contribution (DC) Pension plans - correct answer✔✔• Employer contributes
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
specified sum each period ||\\//|| ||\\//|| ||\\//||
• No guarantee of future benefits
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
• Employee bears investment risk
||\\//|| ||\\//|| ||\\//|| ||\\//||
Defined Benefit (DB) Pension Plan - correct answer✔✔• Employer promises specific
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
payment stream beginning at retirement ||\\//|| ||\\//|| ||\\//|| ||\\//||
• Contributions based on years of service, compensation at/near retirement
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
• Employer bears investment risk
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
• Separate legal entity manages plan assets
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
Endowments - correct answer✔✔• provide ongoing financial support (in the USA, many ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
universities have large endowment funds to support their programs) ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
• investment horizon: LONG
||\\//|| ||\\//|| ||\\//||
• risk tolerance: HIGH
||\\//|| ||\\//|| ||\\//||
• Income needs: LOW
||\\//|| ||\\//|| ||\\//||
• Liquidity needs: LOW
||\\//|| ||\\//|| ||\\//||
Banks - correct answer✔✔Loans are assets, excess reserves invested primarily in fixed-
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
income and money market securities ||\\//|| ||\\//|| ||\\//|| ||\\//||
, • Time horizon: SHORT
||\\//|| ||\\//|| ||\\//||
• Risk tolerance:LOW
||\\//|| ||\\//||
Income Needs: MUST PAY INTEREST ON DEPOSITS ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
• Liquidity Needs: HIGH
||\\//|| ||\\//|| ||\\//||
Insurance Companies (Property Casualty-P&C- and Life) - correct answer✔✔• Time ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
horizon: LONG for Life ||\\//|| ||\\//|| ||\\//||
SHORT for P&C ||\\//|| ||\\//|| ||\\//||
• Risk Tolerance: LOW
||\\//|| ||\\//|| ||\\//||
• Income Needs: LOW
||\\//|| ||\\//|| ||\\//||
• Liquidity Needs: HIGH
||\\//|| ||\\//|| ||\\//||
Portfolio Management Process - correct answer✔✔1) Planning ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
2) Execution||\\//||
3) Feedback ||\\//||
Planning Step - correct answer✔✔• Understand client needs and constraints ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
• Write an Investment Policy Statement (IPS)
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
• Develop an investment strategy consistent with the IPS
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
• Specify performance benchmark
||\\//|| ||\\//|| ||\\//||
Execution Step - correct answer✔✔• Analyze risk and return characteristics of assets ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
classes
• Analyze market conditions to identify attractive asset classes
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
• Identify attractive securities within asset classes
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
• Portfolio construction: Target/strategic asset allocations, individual securities weightings,
||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//|| ||\\//||
risk management ||\\//||
